Performance of Offshore Renewable Energy (ORE)

Firms: An International Perspective

by

Catherine Boulatoff Dalhousie University

and

Carol Marie Boyer

Long Island University

Working Paper No. 2015-01

January 2015

DEPARTMENT OF ECONOMICS

DALHOUSIE UNIVERSITY

6214 University Avenue PO Box 15000

Halifax, Nova Scotia, CANADA B3H 4R2

1

Performance of Offshore Renewable Energy (ORE) Firms: An International Perspective

Catherine Boulatoff

Dalhousie University

Halifax, Nova Scotia, Canada, B3H 3J5

email: Boulatoff@dal.ca

Carol Marie Boyer

Long Island University, Post Campus

720 Northern Boulevard, Brookville, NY 11548

email: carol.boyer@liu.edu

January 15, 2015

2

Abstract

In their quest to promote renewable energy, governments often partner with industry and finance

key stakeholders. This is particularly true when it comes to developing ocean resources, whether

it be tidal or offshore wind energy. In such a challenging environment, it is of important

therefore to understand how these different actors can best cooperate to promote sustainable

ocean governance. Drawing on data from early 2000s, this paper examines how ocean energy

development, subsequently referred to as offshore renewable energy (ORE) has been performing

both nationally and internationally over time. It then analyzes the role of public support in the

industry across countries, both theoretically and in practice. Factors, such as policies (in

particular public funding in the shape of subsidies), both corporate and government Research and

Development (R&D), environmental goals and policies that have played a positive role in the

promotion of the industry, are then examined, and remaining challenges facing the ORE industry

are outlined.

Introduction

The number of national and regional policies in place worldwide to promote the development

and use of renewable energy technologies in general has been on the rise and in an increasing

number of countries1 over the past few decades. Such policies include regulatory policies and

targets, such as feed-in-tariff and biofuels targets and mandates, fiscal incentives such as capital

1 See also the Global Status report 2013 (REN21) published by the global renewable energy

policy multi-stakeholder network for more detailed information.

3

subsidy, grants and/or energy production payment, as well as public financing in the shape of

public investment, loans or grants.

The deployment of viable renewable energy sources follows from a motivation to reduce

greenhouse gas emissions, slow climate change and reduce dependence on foreign sources of

energy. Some positive externalities include fostering job creation and promoting improvements

in health, education and gender equality. For example, based on a wide range of studies, the

direct and indirect jobs created in renewable energy worldwide across industries and across

countries were estimated at 5.7 million within the period 2009-2012. In the EU alone, this

represented 1.2 million people working directly or indirectly in the renewable energy sector. In

China, it amounted to 1.7 million (REN21, 2013).

The challenges facing this move to integrate renewable energy sources with existing

infrastructure and markets are often manifold. If many experts now believe that technology and

costs are no longer major challenges for the industry overall, differences still remain within the

different renewable technologies used. The typical energy cost for onshore wind energy amounts

to 5-16 U.S. cents/kWh in OECD countries, while offshore wind cost of energy ranges between

15 and 23 U.S. cents/kWh (REN21, 2013). Other, more difficult challenges, may relate to

finance, risk-return profiles, social and environmental factors, and an overall rethinking of how

energy systems are designed, operated and financed.

In this paper, we will focus specifically on offshore renewable energy (ORE), which can

broadly be defined as offshore wind, wave, tidal and ocean thermal energy. Although not cost

effective yet compared to other sources of renewable energy, harvesting ocean energy represents

incredible opportunities for the future, especially for countries well endowed in this natural

resource. For example, Canada has some of the most powerful tides in the world in the Bay of

4

Fundy, which makes investigating it worthwhile. Offshore winds are stronger and often out out

of sight, which leads to fewer complaints than onshore wind with its potential negative effect on

the aesthetics of the land.

In order to better understand how government and industry can best support ORE

development, it is important to first learn about the state of affairs in the industry. Therefore, this

paper first describes how the ORE industry has been performing since the early 2000s, both

nationally and internationally. Using firm level data for the past 5 years, we analyze how wind,

wave, and tidal industries perform, today relative to the Russell 2000 index, and in the future,

looking at capital expenditures, investments in research and development, and financial position.

We then look at factors, such as policies (in particular public funding in the shape of subsidies),

both corporate and government Research and Development (R&D), environmental goals and

policies that have played a positive role in the promotion of these industries. This research seeks

to determine which countries or jurisdictions are most supportive of ORE and which policies of

support are most effective. We conclude by outlining the remaining challenges the ORE

industry faces.

This research builds on the work conducted by Boulatoff and Boyer (2014), who

analyzed the performance of over 500 clean technology companies (solar, wind, renewable

energy, transportation) in 34 different countries over the 1990-2011 period and found, among

other things, that three green industries predominantly receiving government R&D during this

period were the solar energy, transport and biofuels. Using regression analysis, the authors

concluded that both corporate R&D and government R&D were positively correlated to firms’

performance.

5

ORE Industry Performance in the Recent Past.

We start by looking at the ORE industry has been performing between 2000 and 2013.

Table 1 below shows the number of companies involved in ORE by country, specifically

Offshore Wind, Wave and Tidal Energy. As can be seen from the table, the Offshore Wind

Energy industry is more developed, as more countries are involved in the industry. One reason

being that the technology has certain economies of scope with the land based Wind Energy

industry. The U.K. has the strongest presence in offshore wind energy. For Wave and Tidal

Energy, the scale of the industry is largest in Australia, Canada, the U.K. and the U.S. As Wave

and Tidal energy firms are typically smaller, with many not publicly traded, they are also

underrepresented in this sample. Overall, the relatively small size of firms operating in wave and

tidal energy can be attributed to it being in a relative stage of infancy compared to other

renewable energy sources such as solar, geothermal and wind energy. Another possible

phenomenon is that often, these firms are government owned, which makes it more difficult to

assess.

Table 1: Number of companies involved in Offshore Renewable Energy by country

Offshore Wind Energy Wave and Tidal Energy

Number of Companies Number of Companies

Australia 2 Australia 9

Belgium 1 Canada 9

Switzerland 1 China 1

China 4 Denmark 1

6

Germany 6 Spain 1

Denmark 4 Finland 1

Spain 2 France 1

France 3 Germany 1

UK 10 UK 11

Ireland 2 Ireland 1

India 1 US 11

Japan 1 47 total

Korea 1

Netherlands 3

Norway 2

Sweden 1

Singapore 1

US 7

52 total

Source: Bloomberg, June 2014.

Investor behavior may also contribute to the relatively small size of firms operating in

wave and tidal energy. Leete et al. (2013), analyzing the attitudes and investors’ behavior

towards wave and tidal energies found that one of the important barriers to investment was prior

experience in these industries investment. Experienced investors were wary of the

unpredictability of costs and time required to develop the needed technologies. New investment

for ocean (tidal and wave) energy increased from 0.0 billion USD to 0.3 billion USD between

7

2004 and 2012. This is still a very small portion of total new investment across renewable

industries for the same period2.

Along with other renewable energy technologies, ORE has seen an increase in

contribution to electric power global capacity in recent years. This increase is captured in

particular by the growing contribution of wind power (onshore and offshore together), reaching

283 GW worldwide in 2012, which is almost 19% of the world total renewable power capacity

when hydropower is included (or 59% if we exclude hydropower). In 2012, the EU-27 produced

106 GW, while BRICS countries generated 96 GW (33%). During that same year, China, the top

generating country, reached 27% of the wind power global capacity reached (75.3 GW total

installed capacity), followed by the U.S. with 21% (60 GW), and Germany generating 11% (31.3

GW). Canada’s capacity was 2% (6.2 GW) (REN21, 2013).

As can be seen in Table 2 below, the amount of energy generated from offshore wind

alone grew by a multiple of 19 over the period from 2003 to 2013. In 2003, the amount of

energy generated was 364 megawatts, and mainly occurred in Denmark. It reached 6,932

megawatts in 2013, with the U.K. and Denmark generating over half of that amount. In 2003,

only four countries were involved in the offshore wind industry, Denmark, the U.K., Sweden and

The Netherlands. By 2013, at least thirteen countries were using the technology to generate

energy, with the leaders being the U.K., Denmark, Germany, Belgium, China, The Netherlands

and Sweden.

Table 2. Cumulative Mega Watts Global Offshore Wind

2 It was 39.6 billion USD total in 2004, and reached 244.4 billion USD in 2012 (REN21, 2013).

8

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003

UK 3,689 3,093 1,524 1,340 688 404 404 304 214 124 64

Denmark 1,271 922 871 868 661 423 423 423 423 423 258

Germany 520 280 200 72 12 12 7 7 5 5

Netherlands 247 247 247 247 247 247 127 19 19 19 19

Belgium 490 335 195 195 30 30

Sweden 211 163 163 163 133 133 23 23 23 23

23

Ireland 25 25 25 25 25 25 25 25 25 25

China 419 369 240 140 2 2 2

Finland 17 17 17 17 15

Japan 39 15 15 15 1 1 1 1 1 1

Norway 2 2 2 2 2 3 0

Portugal 2 2 2 0 0 0 0

Spain 5

.

Total 6,932 5,469 3,501 3,085 1,816 1,277 1,012 803 710 620 364

Source: European Wind Energy Association, 2013.

Looking more precisely at offshore wind energy, the vast majority of the capacity, over

90%, was located off northern Europe, with a lead from the United Kingdom (see table 2 above).

The launch, in November 2012, of the U.K. Green Investment Bank, one of several government-

9

backed green investment banks devoted to investing in clean-technology infrastructure (Gilbert,

2013), further allowed the country to dominate the Offshore Wind Energy Market in 2013. It

continued to lead the offshore wind energy market with 56% of EU installs at the end of 2013,

followed by Denmark and Belgium. Large projects completed in 2013 included the first phase of

the London Array wind farm at 630 megawatts. Siemens extended its global leadership in

offshore wind with its turbine fleet expanding 58% to more than 4 gigawatts, with Vestas and

Senvion (REpower) trailing (Bloomberg, Jan 30, 2014). Siemens is clearly the offshore-wind-

energy leader by installations (Bloomberg, Jan 20, 2014). The closest competitor is Vestas.

The U.K. is hoping to solidify its position as the world's biggest offshore wind market in

2014 (Bloomberg, Mar 31, 2014). Committed legally to deliver 15% of energy from renewable

resources by 2020, and well endowed in marine resources, the country recently opted to cut

subsidies to both onshore and solar power in preference for larger subsidies for offshore power

generation (Financial Times, December 2013), in particular to large-scale projects for cost

considerations. The U.K. offshore wind market is expected to grow even further over the next

decade as the U.K. government has approved several projects recently. Canada and the U.S. are

also seeing a renewed interest in the market thanks to improvement in technology and expertise

(and its associated impact on cost of production), and increased demand for renewable energy in

both countries. For example, approximately 30 states in the U.S. have passed a new legislation

requiring that “at least some of their energy be generated by renewable resources” (Globe and

Mail, 2013).

In terms of specific companies, Dong Energy of Denmark is referred to as a power

producer. It is involved in the energy generation process of offshore wind from development and

ownership to operations and maintenance. The company was responsible for 48% of new

10

installations in 2013 and had a market share of 26%, according to the European Wind Energy

Association (EWEA) data. Dong Energy is majority owned by the Danish government, but due

to the need for capital investment for offshore wind energy, Dong Energy sold a 19% stake (8

billion kroner or $1.5 billion) to Goldman Sachs (Bloomberg, Jan 30, 2014). It should be noted

that this investment not only helps the Danish economy but helps offshore wind farms expands

further. It also creates a multiplier effect boosting revenue for turbine producers Siemens and

Vestas, which both manufacture in Denmark.

Due to high capital expenditure needs to create larger wind turbines, many firms are

partnering with other wind turbine makers (Bloomberg, April 7, 2014). Larger wind turbines

seem to be most cost effective3. To compete with larger, more established players in the offshore

wind industry, Siemens and Vestas, are combining their complementary onshore expertise. For

example, Gamesa, which was the fourth largest producer of wind turbines in 2012, is partnering

with Areva who has offshore experience4. Vestas completed its pilot 8- megawatt offshore wind

turbine, which will be the world's largest, surpassing Enercon's E126 machine rated at 7.5

megawatts. Average turbine sizes rose to 1.85 megawatts in 2012 from 1.5 megawatts in 2008 as

producers strive to obtain more production from available wind resources (Bloomberg, Jan 30,

2014).

One important challenge faced by ocean energy stems from its high cost of production.

The typical levelised energy cost (LCOE) associated with offshore wind ranged from 15 to 23

3 The larger wind turbines, designed to be used offshore in the near future, are 8 to 10 megawatt

machines compared with 3 to 5 megawatts today, to help benefit from economies of scale and as

a result cut the cost of offshore wind. 4 To give a sense of the size difference, Areva and Gamesa's combined offshore wind energy

interests were 55 megawatts in 2013. This contrasts with the 4,051 megawatts in projects for

Siemens and 1,452 megawatts for Vestas (Bloomberg, Jan 21, 2014).

11

U.S. cents per kWh in 20125 (REN21, 2013). Compared, the hydropower (grid based) LCOE

cost of energy amounted to 2 to 12 U.S. cents per kWh that same year, while the cost associated

with tidal range power ranged between 21 and 28 U.S. cents per kWh.

As a result and as would be expected, ocean power still contributed little to the electric

power global capacity as of 2012 (0.5 GW compared to 1,470 GW total, including hydropower,

480 GW if not including hydropower). There was little addition in 2012, and most of the change

related to tidal power facilities. Facilities currently in operation in the world include the 254 MW

tidal project in South Korea (introduced in 2011), the 300 kW wave energy facility in Spain (also

in 2011), the Cobscook Bay Tidal Energy project off the U.S. coast of Maine. Off the coast of

Portugal, three 100 kW wave energy converters were deployed. Other ocean energy facilities in

operation include the old Rance tidal power station (240 MW, France, in operation since 1966),

tidal plants in Nova Scotia (Canada, 20 MW) and in China (Zhejiang, 3.9 MW), as well as

several tidal current and wave energy projects in the United Kingdom (about 9 MW).

ORE Industry Performance Compared to Others.

In order for ocean energy to be viable, it needs to attract future investors. For this to

happen it is therefore important that the returns compensate investors for the perceived risk. As

was the case with the solar and wind industries, as investors become more confident in the

viability of the industry and likelihood of earning a fair return, more investment flows into the

industry, allowing for more research and development to be conducted, leading to advances in

technology and potential reductions in energy costs.

5 This figure is also exclusive of subsidies or policy incentives.

12

Thus, it is key to look at the stock performance of the Offshore Renewable Energy firms.

Results here are somewhat mitigated. As shown in Table 3 below, the one year return for the

Offshore Wind (38 firms) and Wave (3 firms) industries is greater than that of the European

Stoxx 50 Index (26.27% compared to 16.13% respectively). The ORE industries also compare

favorably to the FTSE 100 UK (4.66%), the TSX Canada (18.83%) and US indexes S&P 500

(15.21%) and Nasdaq (19.22%). However, for both the 3 year and 5 year returns, the trend is

switched with the ORE industries underperforming all major European, Canadian and US

indexes. Then again, when looking at the 10 year returns, the ORE industry returns are at par

with equity indexes6.

Interestingly, the returns for the Wave and Tidal Energy firms are higher than that of the

Wind Energy firms, but this is probably due to the smaller sample size (n=3) and a few outlier

firms, although it should be noted that small firms in new industries can exhibit tremendous

growth. Here again, it should also be added that this sample only includes the firms that are

publicly traded. Several firms involved in Offshore Wind Energy and Wave and Tidal Energy

are either government owned or privately held.

Table 3: Performance of Offshore Renewable Energy firms compared to stock indexes

measured by Stock Price Returns

Offshore Renewable Energy (ORE)

Wind and Wave combined

(n=41) Returns 1yr 3yr 5 yr 10 yr

Mean 26.27 4.44 -1.91 5.84

6 The average 10 year stock performance for the ORE industry is 5.84%, compared to 5.49% for

the Europe Stoxx 50 at 5.49%, the FTSE UK at 8.45%, the TSX Canada at 8.78%, the S&P 500

at 7.65%, and Nasdaq at 8.99%.

13

Median 9.85 8.81 -0.15 7.62

St. Dev. 36.20 13.18 7.34 5.42

Indexes (means)

Europe Stoxx 50 16.13 8.19 9.84 5.49

FTSE 100 UK 4.66 8.86 13.23 8.45

TSX Canada 18.83 5.18 11.38 8.78

S&P 500 15.21 14.58 18.18 7.65

NASDAQ 19.22 15.17 20.35 8.99

Offshore Wind

(n=38) Mean 23.36 4.18 -2.10 5.53

Median 9.01 8.75 -0.53 7.24

St. Dev. 48.33 18.07 10.20 7.25

Wave Energy

(n=3) Mean 66.97 7.56 2.70 12.42

Median 66.97 13.17 2.70 12.42

St. Dev. 13.56 3.06 0.37 1.73

In terms of future growth in the industry, opportunities exist for ORE in North America

and in Asia, as well as in Europe, which has seen the most growth in the past decade. In

February 2014, Alstom (France) won a U.S. order for five 6-megawatt offshore wind turbines

from Deepwater Wind for the Block Island offshore wind farm. Block Island may be one of the

first U.S. offshore wind sites to be developed along with the Cape Wind project of the coast of

Cape Cod in Massachusetts. Other potential sites in the U.S. that have been announced are in

Massachusetts, Rhode Island, Delaware and Virginia. In terms of the western U.S. coastline, the

14

U.S. Bureau of Ocean Energy Management allowed Principle Power to submit a plan for a 30-

megawatt floating offshore wind farm in Oregon waters. The project may be the first on the U.S.

West Coast (Bloomberg, Feb 6, 2014). Ideas have been proposed for the deep water of the

western seaboard, which may require floating foundations.

The U.S. and Asian markets offer the best growth potential. Site lease auctions are

proceeding in the U.S., while projects such as Cape Wind, offshore Massachusetts, are making

progress. China, Japan and South Korea are all developing offshore plans, with floating turbines

in deep waters (Bloomberg, May 2, 2014)

ORE firms need to be reasonably large because they need significant capital investments

in order to undertake projects of such a large size. The average market capitalization of ORE

firms is $13.4 billion, which is smaller than the average company listed on the S&P 500, but

larger than the average Nasdaq stock (see table 4 below). The median market capitalization of

ORE firms is much smaller at $11.7 million, indicating that the sample has some very large

firms. This also explains why it makes sense for such firms to be government owned.

Table 4: ORE size measured by Market Capitalization and number of Employees

Offshore Renewable Energy - All

(n=40) Market

Capitalization Employees

Mean 13.45 billion 32,365

Median 11.75 million 3,787

Offshore Wind

(n=38) Mean 14.34 billion 40,536

15

Median 13.51 million 6,600

Wave Energy

(n=2) Mean 1.3 million 589

Median 1.3 million 26

Indexes

NASDAQ 6.49 billion

Euro Stoxx 50

Mean 39.39 billion

Median 33.32 billion

Toronto TSX

Mean $1.9 billion

Median $115 million

S&P 500 $17 billion

Importance of Government Policies in Fostering ORE Industry Performance

Over the years, support from governments has been essential in promoting renewable

energy industries. This support has come in many different shapes, whether it be financial

support aiming at improving technology development, or regulatory and economic instruments

devised to lower the cost of production or consumption to end users. Table 5 below outlines

some of the key policy measures countries have adopted in the renewable energy industry (and

16

ORE in particular), following these countries’ involvement in the ORE industry7. These can

serve as policy ideas to be adopted by countries seeking to promote renewable energy industries.

Table 5. Key elements of renewable energy policy framework in force as of 2013 by

country, for ORE in particular.

Country Year established To be reached by Policy Type Policy Target

Australia 2010 2020 Carbon Pricing

Mechanism

20% of electricity

supply to be

generated from

renewables

Belgium 2010 2020 Quota and green

certificate systems

13% of RES* in

gross final energy

consumption

Canada 2007-2009 In force - Accelerated

capital cost

allowance

-research,

Develoment and

Deployment

(RD&D)

9 provincial RES

targets but no

national one.

7 These countries were described in Tables 1 and 2 earlier.

17

China 2012 2015 Feed-in tariff 9.5% of RES in

gross final energy

consumption

Denmark 2010 2020 Feed-in tariff 30% of RES in

gross final energy

consumption

France 2010 2020 Feed-in tariff 23% of RES in

gross final energy

consumption

Germany 2010 2020 Feed-in tariff 18% of RES in

gross final energy

consumption

Ireland 2010 2020 Feed-in tariff 16% of RES in

gross final energy

consumption

Netherlands 2010 2020 Feed-in tariff 14.5% of RES in

gross final energy

consumption

Norway 2010 2020 Norway-Sweden

Green Certificate

Scheme

67.5% of RES in

gross final energy

consumption

18

Spain 2010 2020 22.7% of RES in

gross final energy

consumption

U.K. 2010 2020 - Feed-in tariffs

- Research and

Development

(R&D)

22.7% of RES in

gross final energy

consumption

U.S. - Grant and

subsidies, tax

incentives

- ORE program

regulatory

instruments, codes

and standards

- State and local

climate and energy

programs

(voluntary

approaches,

information and

education…)

20% of RES in

gross final energy

consumption

*RES = Renewable Energy Supply

19

Note: For a more detailed description of all policies in place in each country to promote

renewable energy (ORE in particular), we suggest the reader go to the IEA agency website.

Source: International Energy Agency. IEA/IRENA Joint Policies and Measures database.

http://www.iea.org/policiesandmeasures/renewableenergy/. Accessed online October 7, 2014.

As can be seen from the above table, many European countries have renewable energy

policy targets of some type, which requires of electricity retailers to source specific proportions

of total power sales from renewable sources (at least 20%). There are at present at least 67

countries with such targets. These targets typically follow the Intergovernmental Panel on

Climate Change (IPCC), which suggested greenhouse gas emission cuts by the year 2020

(sometimes 2025). While it has many provincial targets, Canada does not have a national target

overall. The U.S. approach also differs by state.

To reach this renewable energy source target, several policies have been implemented

since the late 2000s. Many European countries’ main policy scheme relies on Feed-In Tariffs

(FIT). A FIT is an economic policy instrument whereby renewable energy producers are offered

long-term contracts that are typically based on the cost of generation of renewable energy.

Renewable energy sources such as tidal power or offshore wind, which may be higher at the

moment, are offered a higher per-kWh price. By providing price certainty and long-term

contracts, this policy promotes renewable energy investments and financing.

Northern European Economies such as Sweden and Norway have opted to rely on a

market-based mechanism, the Norway-Sweden Green Certificate Scheme. Here also, this support

scheme aims at expanding the production of electricity coming from renewable resources. Under

20

this program, power producers are issued certificates for each mega-watt-hour (MWh) of

renewable electricity they produce. These certificates are sold on the power certificate market,

where supply and demand determine the price, and producers receive additional revenue from

the sale of these certificates. Each year, obliged parties must present equivalent number of

certificates to their obligation quota levels. If certificates are not produced or if an obliged party

falls short of the required number of certificates, a penalty of 150% of the average certificate

value for a given period of time must be paid per each certificate missing. Here again, the goal of

the measure is to provide energy producers an added incentive (lower risk) of generating power

from renewable sources.

Another key factor potentially in promoting the use of renewable energy sources in the

long run is the amount of research and development (R&D) conducted in these industries.

Renewable energy industries, including the Offshore Renewable Energy industries of Wind,

Wave and Tides all make use of technologies requiring consequent R&D. The sources of R&D

can come from either the corporate level (or private R&D) or government level (public R&D).

Table 6 below shows corporate research and development in the ORE industry. The median

amount of R&D being conducted in that sector is relatively similar to that being conducted by

firms in the Euro Stoxx 50 (European firms) and FTSE 100 (U.K. firms). The median amount of

R&D being conducted by an Offshore Renewable Energy firm is $76 million, compared to $87

million for a typical European firm and $86 million for a British firm. Compared to U.S. firms,

this is about half of that for a typical Nasdaq firm ($140 million) but double that of an S&P 500

firm ($32 million).

Table 6: Corporate Research and Development

21

Research and Development

Median Expenditures (millions)

Offshore Renewable Energy - All 76

(n=41)

Offshore Wind

(n=38) 83

Wave Energy

(n=2) 30

Indexes

NASDAQ 140

S&P 500 32

Euro Stoxx 50 87

FTSE 100 86

Following the belief, in the aftermath of World War II, that R&D expenditures were vital

to stimulate economic growth in the long run, public support has been called for. Government

agencies were created to support science and engineering in many civilian industries, among

which is the renewable energy industry. As such, the Environmental Protection Agency (EPA)

was created in the U.S. in 1970, Nature Canada in Canada in 1994. These were created to deal

with environmental issues in general. The Australian Renewable Energy Agency (ARENA) was

implemented in 2012 and its goals are to improve the competitiveness of renewable energy

technologies, and to increase the supply of renewable energy in Australia.

Public support or funding can take the form of tax incentives to reduce the cost of R&D,

and direct subsidies that increase the return on investment for the industry. In addition,

22

government can promote R&D as it conducts research in research labs and universities. For

example, as early as 1974, and still in force, Canada implemented the Program of Energy

Research and Development (PERD). Through this federal and interdepartmental program,

Natural Resources Canada funds research and development in ocean development (as well other

renewable energy sources). Since 2007, the industry also benefits from the Accelerated Capital

Cost Allowance (ACCA). By advancing the timing of capital cost deductions for tax purposes,

businesses are able to defer taxation and this improves the financial return from investment in the

industry. Along the same vein, Australia implemented in 2014 alone, the Regional Australia’s

Renewables (RAR), the Supporting High Value Australian Renewable Energy (SHARE), and the

Research and Development initiatives.

The underlying rationale for government support through these policy measures is that

scientific and technological knowledge have “public good” characteristics. These characteristics

have to do with incomplete appropriability of R& D returns, high risk associated with R&D, and

problems of markets tarred with incomplete information (Stiglitz, 1988). In this context, public

R&D for socially desirable projects such as renewable energy sources are hoped to be

complementary to private R&D, both in the short and long run, as informational spillovers from

public R&D and training of new scientists and engineers might stem from public funding.

Following the model developed by David, Hall, and Toole (2000) for understanding the

impact of government R&D on private R&D, firms’ investment behavior is said to depend on the

cost of and expected return associated with private R&D. The return portion, also called the

marginal rate of return of capital (MRR), in effect the derived demand for R&D, is downward

sloping. As R&D investment increases, the expected return of the additional (or marginal)

investment decreases. In contrast, the marginal cost of capital (MCC) is expected to be upward

23

sloping. The additional cost of capital increases as the firms undertakes more R&D. Following

David, Hall and Toole (2000) notations8, the following two equations capture the above schema:

MRR = f(R, X) (1)

MCC = f(R, Z) (2)

Where R is the level of R&D expenditure, and X may include technological opportunities, the

(potential) market or line-of-business, and/or institutional and other conditions affecting the

appropriability of innovation benefits. As for Z, it includes technology policy measures that

affect the private cost of R&D projects, macroeconomic conditions and expectations affecting

the internal cost of funds, bond market conditions affecting the external cost of funds, and/or the

availability and terms of venture-capital finance, as influenced by institutional conditions.

The firm’s profit maximizing equilibrium is reached when the additional benefit from

R&D equates its extra cost, or when MRR = MCC. This is also the level at which the optimal

level of R&D investment is found (R*)

R* = h(X, Z) (3)

Any change in X and/or Z variables would be reflected in a shift in the corresponding MRR or

MCC. For example, if we assume that government R&D provision is exogenous, then an

‘injection’ of public funding would shift the MCC or the MRR to the right, or both, increasing

the overall optimal level of investment in the industry to say R**. Similarly, direct R&D

subsidies or tax incentives (as described in Table 5 above) might lower the cost of doing research

to renewable energy industries firms. It might also send a positive signal to consumers who will

be more apt to demand energy from these renewable sources.

Data on government R&D allocated by countries for each ORE industry was obtained

8 Page 504 in the original text.

24

from the European based International Energy Agency (IEA) research and development budget/

expenditure statistics, showing data from 1990-2011 for member countries. The IEA

government R&D data covers basic research, applied research and experimental development,

most of which is conducted at universities and research institutions. This data can be seen in

Table 7 below.

Table 7: Government R&D - Total RD&D in Million USD (2011 prices and exch. Rates)

Country Industry Government R&D

1991-2011 20 year

Total

Current GDP per

capita (2009-2013)*

in USD

Netherlands

US

US

Germany

Denmark

UK

Netherlands

Wave

Wave

Wind

Wind

Wind

Wind

Wind

4.79

103.83

1004.89

647.00

369.90

353.78

270.37

47,617

53,143

53,143

45,085

58,894

39,337

47,617

25

Japan

Korea, Rep.

Spain

Italy

Canada

Sweden

Finland

France

Australia

Switzerland

Belgium

Wind

Wind

Wind

Wind

Wind

Wind

Wind

Wind

Wind

Wind

Wind

253.55

185.54

129.81

123.62

123.62

102.33

64.03

40.94

34.34

24.41

3.70

38,492

25,977

29,118

34,619

51,958

58,269

47,219

41,421

67,468

80,477

45,387

26

Portugal

New Zealand

Wind

Wind

2.29

2.01

21,035

41,556

Source: The World Bank, http://data.worldbank.org/indicator/NY.GDP.MKTP.CD. Accessed

October 22, 2014.

As can been seen in the table, 18 countries are conducting research in wind energy

improvements. The governments with the highest amounts of R&D are the U.S., Germany,

Denmark, the U.K., The Netherlands, Japan, Korea, Spain, Italy, Canada and Sweden. R&D for

the wave industry remains sporadic and limited. As mentioned in part 1, the industry still faces

important challenges, which very often deter investors. Despite the limitation of the Wind data

associated to the fact that these figures above include both Onshore and Offshore Wind, Offshore

Wind energy is showing promise and since the technology experiences economies of scale, it

also shows increasing potential to investors.

Studies have been conducted over the years to test the impact of public funding on

private R&D investment. Of particular interest is to know whether public R&D acts as a

complement to private R&D or as a deterrent (or substitute) to it. The most recent work on the

topic was done by Zúñiga-Vicente et al. (2014), who conducted a review of the empirical

literature on the relationship between public subsidies and private R&D investment over the past

fifty years. Their findings indicate that differences in the results obtained from these studies are

still considerable. Still, despite the heterogeneity in (a) the industry, (b) the type of public

funding, (c) the country considered, and (d) the methodology used, complementarity between

public and private R&D seem to prevail. David, Hall, and Toole (2000) also reached similar

conclusions. When looking at our raw data, and even though the portion of funding allocated to

27

ORE energy (wind in particular here) is minuscule compared to total GDP of the above

countries, if we compare it with GDP per capita, we can observe that some countries’ relative

public R&D (such the U.K or the U.S.) is more consequent than for others (such as France or

Canada). When considering now the prevalence of public R&D by these countries and its

associated impact on the ORE industry, it would appear that higher public R&D are leading

countries to be more prevalent in that industry. Since time is an important factor, it will be

interesting to see how public involvement in ORE industry impacts how the industry is faring in

these countries over time.

Conclusive Remarks

When concerned with ocean governance, the topic of ocean resource development and

management often comes to mind. Offshore renewable energy encompasses both far reaching

potential and limitations, in particular when it comes to tidal energy. In this paper, we reviewed

the performance of ORE firms over time (since early 2000s) and examined different factors, such

as policies (in particular public funding in the shape of subsidies, both corporate and government

Research and Development (R&D), environmental goals and policies) that have played a

positive role in the promotion of the industry.

Our findings indicate that along with other renewable energy technologies, the industry

overall has seen an increase in contribution to electric power global capacity in recent years. This

increase is attributed in large part to the development of offshore wind energy. The vast majority

of this capacity, over 90%, was located off northern Europe, with a lead from the United

Kingdom. The launch, in November 2012, of the U.K. Green Investment Bank, further allowed

28

the country to dominate the Offshore Wind Energy Market in 2013. It continued to lead the

offshore wind energy market with 56% of EU installs at the end of 2013, and is followed by

Denmark and Belgium. For Wave and Tidal Energy, the scale of the industry remains small, but

it should be noted that the stock price returns for the three publicly traded Wave and Tidal

Energy firms are impressive. Nonetheless, Wave and Tidal Energy was largest in Australia,

Canada, the U.K. and the U.S. Still, ocean power contributed little to the electric power global

capacity. There was little addition in 2012, and most of the change was related to tidal power

facilities.

In order to predict how ocean energy sources will be performing in the future, we looked

at the stock performance of the ORE firms compared to other firms. Indeed, to attract future

investment to the ORE sector, it is important that the returns compensate investors for the

perceived risk. As investors become more confident in the viability of the industry and

likelihood of earning a fair return, more investments flow into the industry. This capital allows

for more research and development to be conducted, leading to advances in technology, and

potential reductions in energy costs. These reductions in costs of production in turn make the

production of renewable energy from ocean sources more sustainable in the long run. Our

findings show a somewhat puzzling result. The 1 year return for the Offshore Wind and Wave

industries is higher (26.27%) compared to the European Stoxx 50 Index (16.13%). The ORE

industries also compare favorably to the FTSE 100 UK (4.66%), the TSX Canada (18.83%) and

US indexes S&P 500 (15.21%) and Nasdaq (19.22%). However, for both the 3 year and 5 year

returns, the trend is switched with the ORE industries underperforming all major European,

Canadian and US indexes. As for the 10 year returns, the ORE industry experienced similar

returns to the other indexes. The average 10 year stock performance for the industry is 5.84%,

29

compared to 5.49% for the Europe Stoxx 50 at 5.49%, the FTSE UK at 8.45%, the TSX Canada

at 8.78%, the S&P 500 at 7.65%, and Nasdaq at 8.99%. In terms of future growth in the

industry, there are opportunities for ORE in North America and in Asia, as well as in Europe,

which has seen the most growth in the past decade.

Interestingly, the returns for the Wave and Tidal Energy firms are higher than that of the

Wind Energy firms, but this is due to the smaller sample size and a few outlier firms, although it

should be noted that small firms in new industries can exhibit tremendous growth. It should also

be noted that this sample only includes the firms that are publicly traded. Several firms involved

in Offshore Wind Energy and Wave and Tidal Energy are either government owned or privately

held.

ORE firms are also found to be very large. This is important, as the industry often needs

significant capital investments in order to undertake large projects and fund R&D specific to

ORE. This is reflected by the median market capitalization (stock price multiplied by the number

of shares outstanding), which is $13.4 billion (smaller than the average company listed on the

S&P 500, but larger than the average Nasdaq stock). It also explains why in many cases,

government support has been seen as quintessential to allow for a smoother industry ‘take-off’.

Over the years, this support has come in many different shapes, whether it be financial support

aiming at improving technology development, or regulatory and economic instruments devised

to lower the cost of production or consumption to end users. There are at present at least 67

countries with renewable energy targets of some type. These targets typically follow the IPCC

suggested greenhouse gas emission cuts by the year 2020 (sometimes 2025). European countries

typically all require of electricity retailers to source specific proportions of total power sales from

renewable sources (20%). While it has many provincial targets, Canada does not have a national

30

target overall. The U.S. approach also differs by state.

To reach this renewable energy source target, several policies have been implemented

since the late 2000s. Many European countries’ main policy scheme relies on Feed-in tariffs

(FIT). Northern European Economies such as Sweden and Norway have also opted to rely on a

market-based mechanism, the Norway-Sweden Green Certificate Scheme.

The amount of research and development (R&D) conducted in different renewable

energy industries is also key in promoting renewable energy sources in the long run. Renewable

energy industries, including the ORE industries of Wind, Wave and Tidal all make use of

technologies requiring research and development (R&D), both at the corporate level and

government level. The median amount of R&D being conducted in ORE is relatively similar to

that being conducted by firms in the Euro Stoxx 50 (European firms) and FTSE 100 (U.K.

firms), but compared to U.S. firms, this is about half of that for a typical Nasdaq firm ($140

million) but double that of an S&P 500 firm ($32 million).

Finally, this paper discussed the importance of public funding in contributing to the ORE

industry development. In particular, the amount of public support through government R&D was

evaluated. Data on government R&D allocated by countries for each ORE industry was obtained

from the European based International Energy Agency (IEA) research and development budget/

expenditure statistics, showing data from 1990-2011 for member countries. The IEA

government R&D data covers basic research, applied research and experimental development,

most of which is conducted at universities and research institutions.

Our data show that the portion of funding allocated to ORE energy (wind in particular

here) is quite insignificant compared to total GDP of the above countries. Still, some countries’

relative public R&D (such the U.K or the U.S.) is more consequent than for others (such as

31

France or Canada). When considering now the prevalence of public R&D in these countries and

its associated impact on the ORE industry, it would appear that there is a correlation between

higher public R&D and the countries prevalence in that industry. Since time is an important

factor, it still remains to be seen whether and how public involvement in ORE industry will

impact how the industry is performing in these countries over time. Ocean energy (in particular

the wave and tidal industry) still faces important challenges, which very often deter investors.

Technology and costs are still major challenges for the ORE industry. The typical energy cost for

onshore wind energy amounts to 5-16 U.S. cents/kWh in OECD countries, while offshore wind

cost of energy ranged between 15-23 U.S. cents/kWh. Other, sometimes more important

challenges, relate to finance, risk-return profiles, social and environmental factors, and an overall

rethinking of how energy systems are designed, operated and financed.

32

References

Bloomberg L.P. "Offshore Wind Energy Cooperation Is Driven by High Capex

Needs.” Bloomberg Industries: Wind Energy Team, James Evans. 7 April, 2014.

Bloomberg L.P. "U.K. Green Investment Bank Stake Recycles Offshore Wind Proceeds."

Bloomberg Industries: Wind Energy Team, James Evans. 31 March 2014.

Bloomberg L.P. "Gamesa-Areva Offshore Wind Deal Emulates Vestas-Mitsubishi Move."

Bloomberg Industries: Wind Energy Team, James Evans. 20 January 2014.

Bloomberg L.P. “Areva Offshore Wind Unit Leverages Gamesa's Turbine Experience.”

Bloomberg Industries: Wind Energy Team, James Evans. 21 January 2014.

Bloomberg L.P. “U.S., Asia Offer Offshore Wind Installs New Growth Potential.” Bloomberg

Industries: Wind Energy Team, James Evans. 2 May, 2014.

Bloomberg L.P. "Siemens, Principle Power WindFloat Pacific Project Makes Headway.”

Bloomberg Industries: Wind Energy Team, James Evans. 6 February 2014.

Bloomberg L.P. "Goldman-Dong Deal Roils Danish Politics, May Ensure Wind Growth."

Bloomberg Industries: Wind Energy Team, James Evans. 30 Jan., 2014.

Bloomberg L.P. "Vestas Aims at Offshore Wind Market With New 8-Megawatt Turbine.”

Bloomberg Industries: Wind Energy Team, James Evans. 30 Jan., 2014.

Bloomberg L.P. "U.K. Dominated Offshore Wind Energy Market Again in 2013."

Bloomberg Industries: Wind Energy Team, James Evans. 30 Jan., 2014.

David P. A., Hall B. H., and Toole A. A, “Is Public R&D complement or substitute for private

R&D? A review of the econometric evidence.” Research Policy 29 (2000): 497-529.

European Wind Energy Association. http://www.ewea.org/

Green Shoots Lending Power: Governments Launch Green Banks to Boost Private Investment in

Clean Tech by Katie Gilbert. Institutionalinvester.com (February 2013)

International Energy Agency. IEA/IRENA Joint Policies and Measures database.

http://www.iea.org/policiesandmeasures/renewableenergy/. Accessed online October 7, 2014.

Lawrence Dain, “Canada, U.S. poised to catch the offshore wind,” The Globe and Mail, (October

22, 2013).

33

Leete Simeon, Jingjing Xu, and David Wheeler, “Investment barriers and incentives for marine

renewable energy in the UK: An analysis of investor preferences,” Energy Policy 60 (2013):

866-975.

Picard Jim, Cadman Emily. and Clark Pilita, “Offshore wind gains in UK shake-up of

renewables subsidies.” Financial Times, (December 4, 2013).

REN21- Renewables 2013 Global Status Report.

http://www.ren21.net.RenewablePolicy/GSRPolicyTable.aspx

Stiglitz, Jeffrey. Economics of the Public Sector. New York: W.W. Norton and Company, 1988.

Zúñiga-Vicente José Ángel, Alonso-Borrego César, Forcadell Francisco Javier, and Gálan –Zazo

José, “Assessing the effect of public subsidies on firm R&D investment: A survey.” Journal of

Economic Surveys 28, no1 (2014): 36-67.